Although Cathie Wood's flagship fund, the Ark Innovation ETF (ARKK 2.06%), is down by about a third in 2022, it has performed extremely well over the past five years, returning nearly 170%. Focusing on businesses harnessing innovative technologies to disrupt entire industries has proven to be a worthwhile strategy.
The exchange-traded fund (ETF) purchased roughly 300,000 shares of Coinbase (COIN 2.74%) this year, signaling the firm's bullishness on the volatile cryptocurrency company's prospects. I think individual investors would be wise to follow these moves.
Here's why Coinbase, which is the Ark Innovation ETF's fifth-largest holding, is my favorite Cathie Wood stock.
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Coinbase is enabling the cryptocurrency economy
I'm sure most people are familiar with Coinbase's popular brokerage and exchange business. The company is a leader in providing customers with a secure and user-friendly way to trade and store digital assets. As of Dec. 31, Coinbase had 89 million verified users. And during the fourth quarter of 2021, the platform handled $547 billion in trading volume.
Net revenue of $2.5 billion in the most recent quarter was 400% higher than the year-earlier period. But even with this monster growth, Coinbase is a very profitable enterprise. The net income margin was nearly 34% in 2022. Additionally, operating cash flow (excluding the impact of added custodial funds) totaled $4 billion in 2021.
To reduce the company's dependence on the extremely volatile nature of trading volume and transaction revenue, which are reliant on cryptocurrency prices, Coinbase's management team is investing heavily in expanding the subscription and services segment (7% of overall revenue in 2022). One of the most exciting planned launches is Coinbase NFT, the company's marketplace for non-fungible tokens.
OpenSea is the clear leader in the NFT space, and it recently fetched a valuation of $13.3 billion in its latest funding round in January. There is immense value to be unlocked for Coinbase if it can create a competing product with OpenSea's scale. Based on Coinbase's powerful brand and its already huge user base, investors have a lot to get excited about.
Coinbase won't be the first NFT marketplace out there, but it is hoping to become the best by building a superior product with top-notch functionality and security. Just look at Apple. It certainly didn't invent the smartphone. And even today, it's not always the first to introduce game-changing features to market. But the consumer-tech giant has developed a reputation for having the highest-quality hardware and software out there. Coinbase could have this same standing and recognition for excellence in the cryptocurrency space.
At a high level, Coinbase is essentially a bet on the growth of the entire cryptocurrency market. As more people around the world buy cryptocurrencies for the first time, and in the future, start to use them in their daily lives, Coinbase will benefit tremendously. It has a real shot to become the primary gatekeeper that connects the traditional financial ecosystem with the crypto world.
Therefore, it's no question that you must be bullish on digital assets to be an investor in Coinbase shares. Cathie Wood and her firm certainly are.
Coinbase's current valuation is attractive
As of March 21, Coinbase shares traded at a price-to-earnings ratio of less than 12, a huge discount to the S&P 500's 25. This attractive valuation should come as no surprise given that the stock is down 30% in 2022 and 46% since the company went public in April 2021. It's strikingly clear that investors are scared away by the volatility in Coinbase's business.
But if you can stomach the inevitable swings in cryptocurrency valuations, and of Coinbase's stock in the near term, then the potential upside over the long term is absolutely massive.
